Regulators reduce leverage ratio for community banks

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• Key insight: Federal bank regulators reduced the Community Bank Leverage Ratio to 8% and extended the grace period to allow small banks more flexibility.

• Supporting data: The baseline was lowered by 1% and the grace period for banks to come into compliance was doubled to four quarters.

• Forward look: Bank lawyers say more banks should opt in, but that the industry’s overarching focus remains on the Basel III capital reforms that are out for public comment.

The Federal Deposit Insurance Corp., Federal Reserve Board and the Office of the Comptroller of the Currency on Thursday finalized a rule to lower the community bank leverage ratio, which the agencies say will provide more flexibility for small lenders. 

The final rule also extends the grace period from two quarters to four quarters for a community bank that temporarily falls out of compliance with the baseline. 

“The framework continues to simplify regulatory capital requirements for community banks by allowing them to adopt a relatively simple leverage ratio to measure capital adequacy,” the agencies wrote in a release. “Rather than calculating and reporting risk-based capital ratios.”

The community bank leverage ratio is an “optional framework” aimed at reducing regulatory burden on small lenders. It waives the requirements for calculating and reporting risk-based capital ratios for eligible community banking organizations that choose to opt into the regime. 

The CBLR provides a simple measure of capital for small banks. Qualifying community banks organizations that opt in to the program and maintain a leverage ratio of greater than the baseline satisfy risk-based and leverage capital standards and are considered well-capitalized. Regulators issued the proposal in November, and the final version is largely the same as the proposal. 

“The CBLR is intended to provide a simple measure of capital adequacy for qualifying community bank organizations, the CBLR rule removes the requirement for calculating and reporting risk based capital ratios for banks that opt into the framework,” FDIC Chair Travis Hill said at the time. “At the same time, the CBLR is set well above the minimum tier 1 leverage ratio to ensure that banks that opt in continue to maintain strong capital levels.”

Federal Reserve Gov. Michael Barr, who had served as the Fed’s vice chair for supervision until this past February, said he supported the issuance of the proposal but was interested in learning more about whether certain community bank business models should be excluded from eligibility for the CBLR. Barr also said he was interested in learning more about which banks opt into the CBLR versus those who do not.

Banking industry voices have praised the move, especially those that represent smaller firms. The Independent Community Bankers of America President and CEO Rebeca Romero Rainey said the move, which they advocated for,  will free up community bank funds to lend. 

Regulators have been lowering compliance costs for community banks in a number of ways during the Trump administration. As of Jan. 1, 2026, the OCC eliminated policy-based exam requirements not mandated by law, instead giving examiners and regulators a free hand in determining what kinds of examination to conduct on community banks. Examiners will instead use a fully risk-based approach, tailoring exam frequency and scope to each bank’s size, complexity and risk profile. The OCC says the move will rely on examiner discretion and simplify the burden on small firms.

Matt Bisanz, partner at Mayer Brown said the changes were finalized with no major changes, which was expected by industry experts. He says that the changes are positive for small lenders, but much of the banking industry’s attention remains on the Basel capital rule, which will help reduce burden on all banks. 

“There were no material changes from the proposal. While it would have been nice for the regulators to relax the trading asset and off-balance sheet triggers, which are burdensome for smaller banks to calculate, the agencies did at least demonstrate that they seriously considered industry comments on those issues,” Bisanz said in an email. “Additionally, while we expect to see some additional banks opt into the CBLR framework as a result of these changes, much of the industry’s focus remains on the Basel III proposals.”